Market Index Target Term Securites (MITTS)

The Can't-Lose Investment of the Year

Six weeks into the New Year, 2009 is turning out to be not so happy after all.

Instead, doom and gloom still rule the day as the housing bust refuses to be tamed.

Evidently, the more things "change" the more they stay the same.

And in truth, no amount of hope can undo the damage. A wildly overpriced home simply cannot be fixed by the nanny state—even though it is determined to try.

Meanwhile, the stock market bottom that was put in just a few months ago now seems as tenuous as ever, as we fall farther and farther down the rabbit hole.

The average retail investor has been left too stunned to do anything but fear the worst—caughtlike a deer in headlights.

Yet despite the current downturn and all of the nasty losses associated with it, there is one investment opportunity that is completely immune to it all. And yes I did use the words completely immune for a reason, although I could have used bulletproof just as easily.

That's because this investment opportunity really is like no other, especially in troubled times like these.

They are called Market Index Target Term Securities (MITTS), and, to a large extent, they are the perfect investment for today's markets since they offer the prospect of all gain and no pain.

And while that may seem like some sort of market fantasy, MITTS are no miracle.

Instead, market index target term securities are a part of a class of investments known as equity-linked notes.

Market Index Target Term Securities: a Better Way to Battle the Bear

Here's how they work...

Unlike a share of stock, equity-linked notes are actually like a debt instrument or a bond. However, in this case, these are bonds with something of a variable interest rate. That's because the "interest payoff" at maturity is entirely linked to the performance of a specific index or group of stocks.

So when these notes mature or come due, the issuer of the note repays the original principal investment plus an amount based on the appreciation of the underlying stock index.

For example, let's say that you decided to invest in a MITTS tied to the S&P 500. If the S&P 500 has indeed hit bottom and rallies 30% from here, investors in these index-linked notes will realize a 30% return at maturity. Not bad.

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However, if the market decides to go the other way and take the next leg down, the worst you would be faced with is receiving your original investment back. That's true no matter how far the index plummets.

In other words, you have the unlimited upside of the index, but with no risk to your principal.

So how exactly does the market manage to pull this off? It's simple, really. At issue, a portion of the proceeds go into a zero-coupon bond that guarantees the principal at maturity. Meanwhile, the balance goes into a long-term index option that locks in the increase in the index over the life of the security.

As a result, the only way an investor could lose would be if the US Government defaulted on the zero-coupon bonds, or if the issuer of the MITTS went bankrupt.

Buying MITTS at a Discount

But that's not the only aspect of MITTS that makes them so attractive. Like closed-end funds, shares of MITTS trade daily on the exchanges, offering the chance to buy them below their intrinsic value.

This gives investors the chance to lock in a gain as long as they are willing to hold them until maturity.

Take the Merrill Lynch S&P 500 MITTS (NYSE:MCP) due in May 2009, for instance. At issue, it was worth $10 a share. But because of the falling market, it is currently trading for just $9.80 a share, or at a 20-cent discount.

As a result, that means if you were to buy this MITTS today, your profit would be guaranteed. In May, you would receive a minimum payout of $10.00 no matter what happens. And if the S&P did pull off a bounce and rally by 20% at maturity, that payoff would be a full $12.00 a share. Again, all gain and no pain, and it is as real as the sunrise.

So while the flood of bad news may indeed push the markets lower from here, there are ways to position your portfolio to grab a piece of the upside if the markets suddenly turn bullish. Either way, though, you won't take a hit.

That makes MITTS the can't lose investment of year—especially if you've had your fill of losses.

Your bargain-hunting analyst,

Steve Christ, Investment Director

The Wealth Advisory

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